In recent years, California has been grappling with a pressing issue that affects commercial & habitational real estate investors, homeowners, renters, and businesses alike: the Property Insurance Crisis. Devastating wildfires have increased insurance companies’ vicarious exposure via risk assigned to them by the CA Fair Plan, which recently reported was receiving up to 1,000 applications for coverage a day. This and other inflationary challenges have left insurance companies hesitant to provide coverage, or doing so at increasingly exorbitant rates. In this blog, we’ll delve into the root causes of this crisis, its impact on the California property insurance market, and potential solutions for navigating through these turbulent times.
Understanding the Crisis:
1. Wildfires: California’s wildfire seasons have become longer and more severe due to a combination of factors including climate change, land-use patterns, aging power line systems, and forest management practices. These fires not only cause widespread destruction to homes and businesses but also incur significant financial losses for insurance companies.
2. Inflationary Pressures: Labor costs, fuel costs, materials costs, supply chain disruption delay costs, have all increased exponentially in California in recent years. Subsequently, the cost to rebuild structures has naturally become more and more expensive.
3. Increased Regulation: California is one of the most regulated states in the country, with only signs of increased regulation. These regulations not only increase the cost of reconstruction of damaged property, but dramatically increase the time it takes to reconstruct a property, which in turn increases claims cost related to business income and loss of use.
4. Insurance Company Operating Costs: Insurance carriers aren’t immune to inflationary pressures, but in particular there has been a dramatic increase in the cost of reinsurance. To guarantee solvency, the vast majority of insurance carriers purchase reinsurance to hedge against catastrophic events. The rise in catastrophic losses globally has caused a large increase in reinsurance premiums, which ultimately get passed on to the consumer in CAT states such as California, Florida, Texas, Louisiana, etc.
Impact on California:
The Property Insurance Crisis has far-reaching consequences for real estate investors, residents, and businesses across the state:
1. Affordability: Rising insurance premiums and deductibles make it increasingly difficult to afford adequate coverage, particularly in high-risk areas.
2. Accessibility: Some insurance companies have stopped writing new policies or renewing existing ones in certain regions deemed too risky, leaving many with limited options for coverage.
3. Decreased Competition: With most carriers looking to reduce their market share in California, competition for consumer business is at a historic low. This has left many trying to determine which of what seem to be only bad choices to choose from.
4. Property Values: Uncertainty surrounding insurance availability and affordability can negatively impact property values, making it harder to sell properties or obtain financing.
Navigating the Storm:
While the challenges posed by the Property Insurance Crisis are daunting, there are steps that can be taken to decrease the impact of the crisis:
1. Mitigation Measures: Investing in wildfire-resistant landscaping, updating structure’s key operating systems (roof, plumbing, electrical, HVAC) to comply with current codes and be in good working order, can reduce the risk of damage and make properties more insurable. Structures that were once on auto renew with carriers are now regularly being scrutinized. Updates, even in the form of an inspection by a licensed professional, can make an extreme difference in underwriting acceptability and pricing.
2. Shopping Coverage: If being non-renewed, or buying coverage on a newly acquired property, it is essential to shop the insurance aggressively. While it is not recommended to task several brokers to market the policies (this can actually create less competition for your coverage), it is essential that you find a broker who has broad market access and the willingness and savvy to leverage the market on your behalf.
If you are not being non-renewed, under the current market conditions, the strong recommendation is to continue with your insurance carrier, even if they are increasing rates or asking that certain new loss control measures be implemented. This is not the time to start jumping around to different carriers.
With that being said, it is important to be extremely proactive. Don’t assume you won’t be non-renewed, be in contact with your insurance professional well in advance of your renewal. Hope for the best but plan for the worst. Currently, we are presented with stories almost daily of both insurance professionals and policy holders being caught unaware too close to the insurance expiration date to take any meaningful steps to mitigate cost increases.
3. Advocacy and Policy Solutions: Community advocacy groups and policymakers can work together to push for legislative solutions that address the root causes of the insurance crisis, such as climate change mitigation efforts, improved building codes, and incentives for insurers to provide coverage in underserved areas. Currently, insurance commissioner Ricardo Lara’s office is working on what they call the Sustainable Insurance Strategy.
4. Risk Pooling: Exploring alternative insurance options such as state-sponsored insurance pools or cooperative insurance arrangements can help spread the risk more evenly and make coverage more affordable for all residents. However, extreme caution and due diligence is required when placing coverage in any alternative insurance solutions. Many of these solutions don’t have financial evaluation by trusted oversight organizations such as AM Best. Additionally, these solutions tend to have a much smaller pool of capital to rely upon to withstand catastrophic events and can be managed by the unscrupulous or inexperienced.
Conclusion:
The Property Insurance Crisis in California is a complex and multifaceted issue that requires a concerted effort from all stakeholders to address effectively. By understanding the underlying causes of the crisis, working with an insurance professional who has the necessary skill and resources, advocating for policy solutions, and taking proactive measures to mitigate risk, vested parties can navigate through these challenging times and build more resilient communities for the future.
Each month, Swarts Manning insurance experts cover relevant topics for your business. Stay tuned for more discussions about managing your insurance and industry-specific tips.
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